)(a)Identify the revenue and cost related motives for direct foreign investment.

(b)Suppose a U.S. based MNC plans to invest in a new plant either in the U.S or in Zambia. The MNC intends to invest 30% of its investment spending in this new plant while the remainder is devoted to the firms existing structure in the U.S. The characteristics of the proposed new project are given below:

If located in U.S If located in Zambia

Mean expected annual returns on investment 25% 25%

Standard deviation of expected annual returns on investment 0.9 0.11

Correlation of expected annual returns on investment.

with returns on prevailing U.S business 0.80 - 0.05

Determine, with robust quantitative explanation, which location will best provide the firm with a more

stable flow of revenue.